Connecticut Teachers Retirement Board Cost of Living Adjustment in 2023

On November 9, 2022, the Connecticut Teachers Retirement Board (CTRB) announced the approval of their January 2023 COLA.  The announcement followed the Social Security Association’s (SSA) decision to provide an 8.7% adjustment to recipient’s Social Security benefits starting in January of 2023.  The CTRB releases two COLA adjustments each year, and we are currently waiting for the release of the July 2023 adjustment.  On Tuesday, CPI was released, and it showed continued decline of inflation causing the financial markets to rally.  With inflation coming down, should we expect the CT Teachers pension to receive a lower COLA in July? 

Key Takeaways:

·       What is a Cost of Living Adjustment (COLA)

·       Which Employment Group Are You In?

·       How is the COLA in Each Group Calculated?

·       What are the 2023 COLA amounts?

·       Anticipated Changes to Group 1 COLA in July

·       Concerns Over Recent COLA Amounts

What is a Cost of Living Adjustment (COLA)?

A Cost of Living Adjustment (COLA) is the adjustment of one’s retirement benefit to account for increasing prices caused by inflation.  This adjustment is designed to help their retirement benefit maintain its purchase power.  This can best be explained through an example.  Let’s imagine a retiree uses 10% of their monthly benefit to purchase the same basket of goods each month.  If the market experienced a high level of inflation, then the increase in prices would require the recipient to use 15% of their monthly benefit to purchase the same basket of goods.  This would leave the individual with less money at the end of the month which could create disturbances in their lifestyle.  Instead, the CTRB will determine a COLA that will increase the recipient’s benefit enough that the basket of goods will cost around 10% again.  

The COLA discussed in this article refers to the pension adjustment provided by the Connecticut Teachers Retirement Board.  The CTRB provides an annual COLA for members once they have been retired for a minimum of nine months.  The COLA increase is applied in either January or July depending on the members effective retirement date.  Those who retire between November and April receive their increase in January and those who retire between May and October receive their adjustment in July. 

Which Employment Group Are You In?

The Connecticut Teachers’ Retirement Board splits retirees into three groups based on retirement date.  The first group is composed of members who retired prior to September 1992.  As the oldest, this group receives the largest COLA of the three groups each year.  The reason behind this is that many of these individuals rely solely on their pension income to cover their living expenses.  Without a significant COLA, these individual’s benefits would no longer be in line with today’s inflation and economic outlook.  We will discuss further below, but if the adjustments provided each year are not large enough, then the disparity between the benefit and current prices can grow quite large.  

The second group is for members who retired on or after September 1, 1992 and joined the system prior to July 1, 2007.  They currently sit as the median group between the oldest and newest retirees.  The newest retirees can be found in the third and most recent group.  It includes members who retired on or after September 1, 1992 and joined the system on or after July 1, 2007.  These members have historically received the lowest COLAs because their salaries were most in line with the current economic conditions. 

How is the COLA in Each Group Calculated?

Starting with the first group (retired prior to September 1992), the COLA calculation differs based on the month you retired.  Those who retired between November and April receive an increased based on the National Consumer Price Index (CPI) for the twelve month period ending on November 30th of the prior year.  While those who retire between May and October will receive their COLA based on the National CPI for the twelve month period ending on May 31st of the prior year.  The COLA for group one ranges from a minimum of 3% to a maximum of 5% per year.

The COLA for the second group of retirees (joined the system prior to July 1, 2007) is calculated differently.  It is calculated using the United States Social Security Administration (SSA) COLA and the investment performance of the retirement fund in the prior year with a maximum potential COLA of 6%.  However, if the investment performance is less than 6.9% then the maximum potential COLA is 1.5%. 

The COLA for the third group of retirees (jointed the system on or after July 1, 2007) is calculated like the second group.  The COLA is based on the SSA COLA and the investment performance of the retirement fund in the prior year with a maximum potential COLA of 5%.  If the investment performance of the retirement fund is less than 6.9% then the maximum potential COLA is 1%.  If the investment performance is between 6.9% and 9.9% then the potential maximum potential COLA is 3%.  Lastly, if the investment performance exceeds 9.9% then the maximum potential COLA is 5%. 

If you would like to see the CT Teacher’s Retirement Board Cost of Living Adjustments since 1978 then you can follow the link.

What are the 2023 COLA amounts?

As discussed above, each group gets its own respective COLA.  In January 2023, the first group (retired prior to September 1992) received the maximum potential COLA of 5%.  They have received the maximum every year since July 2021 and received 3% for over five years before that.  Currently, the only 2023 increase not listed is the first group’s July 2023 increase.  It is currently labeled as TBD and may signify that the CTRB wants to reduce the COLA which I will discuss below. 

The second group (joined the system prior to July 1, 2007) will receive a different COLA in 2023.  In 2022, the second group received a 5.9% COLA because the Social Security Association paid a 5.9% COLA and it fell below the maximum COLA threshold.  However, the 2023 COLA for group 2 in both January and July is 1.5%.  Which means that the investment performance of the retirement fund was less than 6.9% resulting in a 1.5% (maximum) COLA in 2023.  

The third group (joined the system on or after 1, 2007) will also receive a reduced COLA in 2023 as well.  In 2022, group 3 received the maximum adjustment of 5%.  Although now that inflation is no longer running rampant, they will no longer receive the maximum.  In 2023, group 1 will receive a COLA of 1% in January and July.  As stated above, investment performance was less than 6.9% resulting in the lowest maximum benefit of 1%.  As you can see, the COLA adjustment favors those who retired a longer time ago as they have gone the longest without income.

Anticipated Changes to Group 1 COLA in July

On Tuesday June 13, 2023, the May 2023 CPI numbers were released.  CPI increased 0.1% last month, which was a significant change compared to April when it increased by 0.4%.  This represented an annual change in CPI from 4.9% in April to 4.0% in May.  The other core measure is the annual Core CPI, which was 5.3% in May.  This was the lowest Core CPI value seen in over a year as it was a reduction from the 5.5% annual Core CPI seen in May. Which means that the Fed is starting to see the effects of their rate hikes throughout the past couple years. 

Following these events, the Fed decided to pause interest rates as they claim that they want to further analyze the effects of these interest rate hikes.  Although, they did hint at a potential 1-2 more 25 basis point hikes at the next couple meetings.  That said, interest rates have more than started their descent.  The Feds current plan is to keep rates held around this level, at the least, through 2023 (unless something breaks).  Which means that inflation should continue its downward trajectory with little issues as the Fed sticks to their “Higher for Longer” mantra. 

With these developments in inflation, it wouldn’t be surprising to see a downward adjustment to group 1’s COLA in July 2023.  Group 1 received a COLA of 5% in January while group 2 and 3 were granted 1.5% and 1%.  There is a large disparity here, and if you look at the chart I posted above, the COLAs between groups are rarely that different.  Historically, it looks like group 1’s COLA is often double that of group 2. Therefore, if I had to make an educated guess, then I would assume that group 1’s July 2023 COLA is going to decrease to around 3%. 

If you would like to learn about the Social Security COLA in 2023 then please follow the link.

Concerns Over Recent COLA Amounts

It has been discussed a few times, but the Federal Reserve is doing what it can to bring down inflation.  That said, inflation still stands at highly elevated levels and will take time to return to the Fed’s target of 2%.  The issue is that pensions and Social Security will have to provide significant cost of living adjustments to cover this for their recipients.  However, what if those funds don’t cover the full inflation amount? 

On June 13, 2023, the annual CPI for May 2023 fell to 4.0%.  This was the lowest CPI value seen in over a year and the month before it was 4.9%.  For reference, the annual CPI in January 2023 was 6.4%.  At that time, the January COLA recipients received benefits significantly below the CPI of 5.0%, 1.5%, and 1.0% for each group in ascending order.  Even with the help of the COLA, these groups all saw deterioration of their benefit against inflation. This would result in these retirees spending an abnormally large amount of their benefit to purchase the same basket of goods they did previously.  

The impacts of the disparity between COLA and inflation would be minimal for one occurrence, but several times could create complications.  If these retirees were to receive an annual COLA significantly below the inflation level for several years, then it can be assumed that the value of their benefit would have diminished.  However, this spike in inflation appears to be at its tail end so there is no reason for worry yet.  The Federal Reserve should be able to achieve their 2% target within the next two years (likely sooner) and then the COLA will have less of an impact on your benefit.   

If you are a Connecticut State Employee and would like assistance with retirement planning then you can schedule a free consultation.  During the call, we can discuss your financial position and future needs to determine if my expertise would be a good fit. 

If you are interested in reading related blogs, then I would recommend:

“What Connecticut State Employees Should Do With Extra Vacation Days”

“How to Calculate the Cost of Living Adjustment for CT State Employees”

“The Most Conservative Investment Options in the CT State 457 Plan”